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Implicit Collusion in Non-Exclusive Contracting under Adverse Selection

  • Han, Seungjin

This paper studies how implicit collusion may take place through simple non-exclusive contracting under adverse selection when multiple buyers (e.g., entrepreneurs with risky projects) non-exclusively contract with multiple firms (e.g., banks). It shows that any price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through the triggering trading mechanism in which they change their terms of trade contingent only on buyers' reports on the lowest average price that the deviating firm's trading mechanism would induce. It suggests that a good can be overpriced in a competitive market even with fully rational traders and without firms' explicit collusive agreement.

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File URL: http://socserv.socsci.mcmaster.ca/han/research/CNE_7.pdf
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Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number seungjin_han-2011-10.

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Length: 24 pages
Date of creation: 26 May 2011
Date of revision: 02 Apr 2013
Handle: RePEc:ubc:pmicro:seungjin_han-2011-10
Contact details of provider: Web page: http://www.economics.ubc.ca/

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  1. Giacomo Calzolari & Alessandro Pavan, 2007. "Sequential Contracting with Multiple Principals," Discussion Papers 1457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  3. Han, Seungjin, 2007. "Strongly robust equilibrium and competing-mechanism games," Journal of Economic Theory, Elsevier, vol. 137(1), pages 610-626, November.
  4. Takuro Yamashita, 2010. "Mechanism Games With Multiple Principals and Three or More Agents," Econometrica, Econometric Society, vol. 78(2), pages 791-801, 03.
  5. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  6. Han, Seungjin, 2004. "Menu Theorems for Bilateral Contracting," Microeconomics.ca working papers han-04-01-29-10-05-13, Vancouver School of Economics, revised 29 Jan 2004.
  7. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  8. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  9. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2009. "Non-Exclusive Competition in the Market for Lemons," TSE Working Papers 09-055, Toulouse School of Economics (TSE).
  10. Biais, Bruno & Martimort, David & Rochet, Jean-Charles, 1998. "Competing Mechanisms in a Commun Value Environment," IDEI Working Papers 75, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Jaynes, Gerald David, 1978. "Equilibria in monopolistically competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 19(2), pages 394-422, December.
  12. Laurence Ales & Pricila Maziero, 2009. "Adverse Selection and Non-Exclusive Contracts," GSIA Working Papers 2010-E61, Carnegie Mellon University, Tepper School of Business.
  13. Peters, Michael, 2001. "Common Agency and the Revelation Principle," Econometrica, Econometric Society, vol. 69(5), pages 1349-72, September.
  14. Hellwig, Martin F., 1988. "A note on the specification of interfirm communication in insurance markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 46(1), pages 154-163, October.
  15. Peters, Michael & Troncoso-Valverde, Cristián, 2013. "A folk theorem for competing mechanisms," Journal of Economic Theory, Elsevier, vol. 148(3), pages 953-973.
  16. Gerald D. Jaynes, 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Levine's Working Paper Archive 786969000000000243, David K. Levine.
  17. Alessandro Pavan & Giacomo Calzolari, 2010. "Truthful Revelation Mechanisms for Simultaneous Common Agency Games," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 132-90, May.
  18. Jaynes, Gerald D., 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Working Papers 91, Yale University, Department of Economics.
  19. Larry Epstein & Michael Peters, 1996. "A Revelation Principle For Competing Mechanisms," Working Papers peters-96-02, University of Toronto, Department of Economics.
  20. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Non-Exclusive Competition under Adverse Selection," CEIS Research Paper 192, Tor Vergata University, CEIS, revised 31 Mar 2011.
  21. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2013. "Two-sided communication in competing mechanism games," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 62-70.
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